This commentary was originally published by the authors as a PDF and sent via email from Weil Gotshal & Manges.

All corporate governance participants—boards, executive officers, shareholders, proxy advisors, regulators and politicians—have both an interest and a role to play in rebuilding trust in the corporations that are the engine of our economy. In our annual reflection, we offer thoughts on how, without the need for regulatory intervention, boards and shareholders can seize the opportunity to rebuild trust and, by doing so, help resolve some of the tensions that are stalling our economic recovery.

Part I – Opportunities for the Board to Rebuild Trust

1. Focus on the long-term. Boards carry out their fiduciary duties in the face of pressures from the market and short-term traders for immediate results, pressures that too often undermine the long-term planning and investment required for a sustainable enterprise. While management must focus on the day-to-day operations of the company, the board has the ability and responsibility to look forward and consider what is in the best interests of the corporation and its shareholders over a time horizon notably longer than the quarter at hand. The board should bring its objectivity and judgment to issues ranging from dividend policy, strategic direction, risk and executive compensation to corporate social responsibility and ethical culture. When coupled with a clearly articulated strategy, the board’s commitment to the long-term should help a company withstand undue short-term pressures. This requires effective disclosure of board decisions and policies and concerted efforts at shareholder relations and communications, both areas where boards often could focus more attention.

2. Redefine board priorities. The part-time nature of director service combined with ever-expanding expectations about the board’s role and increasing regulatory mandates may lead to an unfocused and overly long board agenda. Boards should delegate to board committees, corporate management and advisors those matters that do not require the attention of the full board so that the board can focus on key priorities. Defining board priorities is the board’s task, one that should be undertaken in an informed manner with advice from management and counsel but not be delegated to them. We suggest that boards consider an 80/20 rule: Approximately 80 percent of board time should be spent on those issues that are reserved by law to the board, that will benefit from the exercise of fiduciary judgment or as to which management has inherent conflicts, such as corporate strategy and the major risks to that strategy, material transactions, management performance and succession, and executive compensation. The board should also reserve “quality time” for matters of its own performance and composition. This is a simplified list and of course every board will need to work it out based on its own challenges and characteristics, but the key is to maintain significant time for the significant and difficult issues. Leading the effort of redefining board priorities and ensuring sufficient agenda time for priority matters are roles for the board’s independent leader – either a separate independent chair or a lead director. We note that the number of companies with separate independent chairs is continuing to rise, and it is now well-accepted that public companies should either have an independent chair or have a lead director with a role that is defined to include a number of tasks that would otherwise typically fall to a board chair.

3.  Apply objectivity and “backbone” to fiduciary judgments. Directors must decide for themselves what is in the best interests of the company. Clearly, management has a view that it will advocate, but the board needs to test the underlying assumptions and come to its own conclusion. While undue deference to management is not appropriate, neither is abdication of fiduciary decisions to shareholders. Fiduciary decision-making cannot be abdicated, even if a majority of shareholders have a definite preference on an issue. This may pose challenges when significant shareholders have strongly held views, or when a proxy advisor takes a stance and in effect serves to coordinate support for that stance among its client shareholders. The bottom line is that directors need to be willing to do what they believe is right, even if doing so jeopardizes re-election.

4. Listen to and communicate with (“engage”) shareholders. Success in withstanding pressures for actions that the board does not believe are in the company’s best interest depends on the board’s ability to communicate effectively with shareholders. The starting point is knowing who your significant shareholders are and what concerns them. (It helps to maintain open channels of communication with the persons who have voting and investing authority, and these roles are often split in large institutional investors.)

Encouraging feedback generates goodwill and can elicit good ideas. Obtaining a preview of concerns also provides opportunity to avoid acrimony by working through issues in advance. Directors should listen hard to what shareholders have to say and consider any disconnects between the views of shareholders and the board, for example, where a management proposal or a director receives a negative (or not overwhelmingly positive) vote at the annual meeting. Boards should work with management to ensure that board decisions are adequately explained to investors, regulators and other users of corporate information. Disclosure documents should be reviewed with a critical eye towards enhancing understandability and slashing boilerplate. Communication with shareholders(and employees) will become even more critical once the SEC adopts new disclosure requirements relating to internal pay equity and pay-for-performance as required by the Dodd-Frank Act of 2010.

5. Be self-critical. If shareholders are to give boards the time and space to take the long view, and generally defer to and support their judgments, they need assurance that boards will bring objectivity and backbone to judgments about the board’s own effectiveness. Re-nomination decisions need to be based on an active assessment of director performance and whether the director continues to be a strong fit. All directors need to have skill sets that continue to be not only relevant but necessary to the evolving direction of the company’s business and be engaged in board and committee activities at a high level.

Board “refreshment” mechanisms such as age limits and term limits should be carefully considered. While they can help to assure compositional change, they are imperfect substitutes for active assessment of individual performance, and they may set an inappropriate expectation of long tenure. Similarly, the annual self-evaluation of the board and its committees provides an opportunity for reflection about areas for improvement. This should not be allowed to become a rote exercise. Consider changing up the methodology from time to time, for example, by every several years taking a deeper dive through an interview method rather than relying on paper questionnaires. No matter what method is used to gather viewpoints from directors, every year the evaluation should result in a focused board discussion of areas for improvement.

6. Pay special attention to “hot button” issues. Boards should make decisions about “hot button” issues in the best interests of the company and persuasively communicate the reasons for those decisions. Proactively discuss any anticipated negative feedback from the proxy advisory firms on relevant issues. The issues requiring special attention will depend on the company, but for most companies will include strategic direction, risk oversight, executive compensation, proxy access, board composition, succession, board leadership, political contributions disclosure, corporate social responsibility and structural defenses.

• Corporate Responsibility. The 2012 presidential election year is likely to bring heightened attention to issues related to corporate responsibility generally and to corporate political power in particular. In 2011, both the number of social and environmental proposals brought by shareholders and the support for these proposals increased. Boards should be prepared for particular scrutiny of their oversight of corporate political spending and should be sensitive to that issue. In addition to calls for greater disclosure of board policies and decisions with respect to political spending, boards should expect calls for greater disclosure regarding corporate impact on natural resources, with an emphasis on water and air quality and supply chain sustainability. Boards should ensure that these topics receive appropriate attention on the board agenda and should keep tabs generally on public sentiment as it relates to the company and issues of corporate responsibility generally. This is an area where the board may be particularly well positioned to assess the general environment and advise management.
• Executive Compensation. Say on pay acted as a “release valve” allowing shareholders to let off steam in 2011, resulting in fewer “withhold” and “against” campaigns targeting individual directors in elections. It will still be high on the shareholder agenda in 2012. To bolster support in the coming year, boards and compensation committees should recognize that many shareholders are looking for them to demonstrate restraint. Expect pay for performance to continue as the primary factor in obtaining shareholder approval, with shareholder sensitivity to pay levels relative to peers and pay increases out of proportion to performance trends. Consider the shareholder perspective on (and public perception of) the company’s executive compensation program and related disclosures, including, how the program matches up the new ISS guidelines (given its influence). Don’t just read a final draft of the proxy statement – advocate early that it explain the company’s compensation philosophy, and the alignment between pay and performance in clear and understandable terms. Finally, be willing and available to follow-up with key shareholders to discuss the board’s approach to say on pay. Boards of companies that failed to receive a majority vote in favor of executive compensation or received a high proportion of negative votes (even though receiving a majority vote in favor) should identify the primary shareholder concerns and take a hard look at whether changes are called for, based on fiduciary judgment.
• Majority Voting. Boards should expect a concerted effort from shareholders to extend majority voting to the remainder of the S&P 500 and beyond to the next tier of companies in 2012. Boards at companies that have not yet adopted a majority voting standard, or a director resignation policy in the event a director fails to receive a majority of the votes, should be prepared to address this issue with shareholders.
• Proxy Access. 2012 is the first year in which shareholders may bring proposals seeking bylaw changes to allow proxy access for shareholder nominations of director candidates in competition with the board’s own nominees. (Any adopted bylaw changes will not be applicable until the next year.). While public pension funds and union funds are expected to bring a relatively focused set of proposals concentrating on high-profile companies that have had significant governance, compliance or performance issues, individual shareholders involved in the U.S. Proxy Exchange (USPX) and the Norwegian Pension Fund Global (NPFG) have already submitted a dozen or more proposals. The non-binding USPX proposals generally ask that the board adopt a bylaw to permit proxy access for director nominees from shareholders that have held continuously for two years percent of the company’s eligible securities and/or any party of 100 shareholders each of whom satisfy the basic SEC Rule 14a-8(b) eligibility standards (holding a $2,000 stake for one year). The NPFG’s proposals are reportedly binding proposals and also have a low threshold, requiring that a shareholder hold a minimum of 1% of company stock for year. Boards should follow developments in this area closely. Maintaining strong relationships with significant shareholders and understanding and, as appropriate, addressing their concerns continues to be the best preparation for a potential proxy access proposal.
• “Vote No” Campaigns. Boards may see an up-tick in the number of campaigns against directors up for re-election. ISS has a fairly long list of circumstances that will cause it to recommend voting against a director in an uncontested election. In addition, “vote no” campaigns may target compensation committee members at companies where shareholders and proxy advisors deem the committee and board unresponsive to the 2011 say on pay vote even where the proposal “passed”. Boards should review ISS’ recently revised policies early to understand where vulnerabilities may lie so that they can take appropriate action, including, if necessary, targeted shareholder outreach.

Part II – Opportunities for Shareholders to Rebuild Trust

1. Focus on the long-term. Shareholders should give the board and management freedom to make decisions over a long-term time horizon. Focusing on the long-term is particularly critical during a downturn. While plowing resources into R&D and other job creation and growth strategies may restrain the bottom line in the near-term, such investments are necessary to reap rewards for the company and its shareholders—and society—later on. Shareholders may need to evaluate their own decision-making structures and ensure that they are not rewarding high-risk behaviors, whether through direct investments or through the monies they invest through other entities.

2. Refine shareholder priorities and reduce “noise.” Boards of public companies are bombarded with a wide array of viewpoints about corporate governance and social and environmental issues. Institutional shareholders should identify the two or three issues (in addition to return on investment) that are most important to them and then clearly and consistently articulate their views. Laundry lists of concerns should be prioritized to ensure that the board can hear and focus on the things that are most important to shareholders. These priorities can also help shareholders to ground their approach to voting analysis (see below).

3. Vote responsibly. With power comes responsibility. Where shareholders do not have the resources to become informed on an issue on a company-specific basis, it makes sense for them to generally defer to the board’s recommendations. We note that many may consider this heresy, but presumably most shareholders have invested in a company because of faith in the direction that the board and management are taking the company. Alternatively, they are investing because the company has been included in an index that the shareholder invests in, deferring to the judgment of others. Deference to board recommendations in most instances would allow shareholders to focus scarce voting analytic resources on companies where a significant performance or other red flag issue is apparent. In such instances, shareholders should apply their resources to becoming well informed prior to voting.

4. Delegate and/or rely on others responsibly. A corollary of the admonition to “vote responsibly” is to delegate or rely on others responsibly. When choosing advisors to assist with voting analysis and recommendations, do so on an informed basis after performing due diligence as to their capabilities. Consider whether they have the resources to provide informed and tailored advice specific to portfolio companies or are unduly reliant on a set of fairly rigid voting guidelines. The more reliant they are on junior seasonal workers who turn over every year, the less likely that they are able to provide rigorous, sophisticated and tailored analysis. If you are having the advisor tailor policies specifically to your specifications, consider using a performance screen and instructing the advisor that so long as the company is performing well and there are no significant red flags (and mere failure to adopt a particular governance policy favored by the advisor shouldn’t count as a red flag), to vote as the board recommends.

5. Speak up, but be willing to listen. Shareholders should share their concerns with boards and should also provide feedback when requested. Shareholders should also be prepared to listen to what boards have to say – communication is a two-way street. Communication can take various forms, from formal meetings conducted in accordance with Regulation FD, to posts on Twitter or other social media tools. Remember in communicating with a board that other shareholders may have different—and even conflicting—views. Also recognize that some means of communicating lack nuance. An example is the up-or-down vote on say on pay resolutions which provides shareholders with an imperfect forum in which to let the board know how it is doing on compensation and, indirectly, on performance generally. Follow up with concrete suggestions and give the board the opportunity to respond. Recognize that it takes time to make significant modifications to a company’s compensation program. Also, remember that while shareholder views about appropriate compensation should be considered, executive compensation is fundamentally the board’s responsibility.

6. Carefully consider private ordering options. Shareholder proposals relating to proxy access—whether by way of precatory resolution or binding bylaw amendment—should include meaningful ownership thresholds and other qualifications to ensure that director elections proceed in an orderly manner and are not hijacked by special interest groups. Proxy access should be viewed as a last-resort mechanism. Engagement with the company’s nominating committee on board composition should always be the preferred course.

Ira M. Millstein is a senior partner at the international law firm Weil, Gotshal & Manges LLP, where, in addition to practicing in the areas of government regulation and antitrust law, he has counseled numerous boards on issues of corporate governance. Holly J. Gregory is a partner in corporate governance at Weil, Gotshal.

Preparation starts even before the first class. “I want you to do some thinking, meditation and preparation before you walk through that door,” says Stephen Burnett, associate dean for executive programs and professor of strategic management at Northwestern University’s Kellogg School of Business. “I want you to meet with your boss and subordinates, think about your own situation and what you personally want from this experience.” Unlike an MBA course, many executive education classes and seminars allow participants the opportunity to bring their real-life corporate dramas to the classroom. Burnett advises executives and directors to have a different perspective on the learning experience: “This isn’t a movie you’re going to sit back and watch—you can change the executive program by the questions you ask, by who you talk to and what you ask them.”

Rather than view the seminar or course as just another class, today’s schools are emphasizing the need for participants to enter the classroom with the intent to discuss their own corporation’s issues and find solutions. “We’ve been counseling very hard to get committees or management staff to think about their proxy statement as a message of engagement…[an opportunity] to get to know shareholders,” says Ira Millstein, senior associate dean for corporate governance and Eugene F. Williams Jr. Visiting Professor in Competitive Enterprise and Strategy at Yale School of Management. “Communication with shareholders could be the most important thing right now [for directors to focus on], because shareholders are so much more powerful.”

Strategy is also a major area of interest for executives and directors, who are often looking how to best lead their companies as the economy reels from bad decisions and heightened government regulation. “Executive education is now seen as a tool for implementing strategy,” Darden Executive CEO David Newkirk says, adding that many clients attend programs to adjust to changing roles and deal with the effect on the entire organization, not just upper management and the board. He notes that executives and directors find themselves asking: “How do I take the next 200 to 1,000 people and help them understand the strategy and how their roles will change and then give them the capabilities to implement that new strategy?”

Directors in particular are beginning to realize that traditional skills are no longer enough to ensure effective boardroom performance. “The directors who join us,” says Liz Barron, director of education for the NACD, “really want practical solutions based on boardroom experience. We’ve seen a huge interest in committee processes—the chairs of nominating and governance, audit and compensation committees—come to us looking a little green about the gills and find the work we’re doing on performance metrics, audit-committee processes and our proxy-disclosure template really helpful. Their complexions improve as their confidence begins to grow and they begin to see new ways of keeping on top of their workload and providing the right amount of oversight.”

No Room for Complacency

When a corporation sends C-suite executives or corporate directors to learn more about strategy, risk or compensation, they expect lessons to be applied in real time. Many of today’s most acclaimed institutions welcome this one-on-one interaction, using participants’ experiences as tools that are as highly valued as classroom texts and keynote speakers. “Many times you listen to one panel, move on and then onward…you only have time to raise your hand and maybe get a question answered—that’s it,” says Kip Kelly, director of marketing at the University of North Carolina Executive Development. “At UNC, we’re moving toward smaller post-panel group sessions with longer breaks.”

Instead of having topic-specific breakout sessions, UNC has instituted “problem-solving sessions,” allowing directors and executives the opportunity to share situations they are facing with others who may have already had similar issues. “Instead of rushing to the stage to ask the speaker a question, participants can have real discussions back and forth with speakers,” says Linda Selbach, program director of the Director Development Institute at UNC.

An interesting pool of participants is enticing, but the main keynote attraction is also vital, as participants want to hear from high-profile personalities deeply involved in some of today’s most tumultuous and challenging situations. “Last semester, Hank Paulson was interviewed by John Mack on campus; Tim Geithner gave his first post Dodd-Frank passage here at Stern,” says Joanne Hvala, associate dean, marketing and external relations at New York University’s Stern School of Business. “We were able to invite some of our students to attend, as well as stream the discussions online—history-making experiences right here on campus.”

Location and accessibility to regulators in Washington also can be helpful, as the government and Securities and Exchange Commission continue to increase regulation. “We’re able to attract the policy makers,” says Stephen Wallenstein, who oversees the Director’s Institute and is a senior fellow of finance at the University of Maryland’s Robert H. Smith School of Business. “Half of our program is composed of breakout sessions composed of 15 to 20 people—people are not just listening passively, because we try to mix in some of the substantive areas that we think are important for all directors, with an equal number of breakout sessions.”

Collaborative Approach

Some universities find that combining their expansive repertoires can provide a unique experience for participants. Stanford’s Graduate School of Business, Dartmouth’s Tuck Executive Education program and the University of Chicago’s Booth School of Business have combined resources to offer a wide array of faculty and speakers for executive education attendees. Sean Bandarkar, managing director of program and business development of executive education at Stanford, believes that having research from top faculty in the field of corporate governance from three universities offers a unique perspective for program participants. “The key thing that we do is bring in the university’s point of view…but we also balance that with the knowledge and experience from our participants,” Bandarkar says. “If you bring in too much of a university point of view, you don’t get the real experiences; without the faculty, however, you just get a room full of war stories with no structure.”

The method of teaching also contributes to a successful executive program. “Unlike in a lecture for an MBA, in an executive education program you need a faculty member who is such an expert that they’re willing to let go and take a conversation or exercise elsewhere—where they may not have even thought of originally or intended,” says Clark Callahan, executive director of Tuck Executive Education at Dartmouth. “It takes a master to be able to do that.” Callahan believes confidence and presence are also factors when selecting potential speakers and panelists. “It is important to have credibility when you walk into a room,” Callahan adds. “You are a source that people should be listening to.”

The proper blend of academia and real-world experience is key to a successful and engaging seminar. “Academics have the luxury of having a lot of time to get things done,” says David Heckman, practice leader, senior management, at The Aresty Institute of Executive Education at The Wharton School at the University of Pennsylvania. “Practitioners are good at saying, ‘These things need to be perfect.’ We understand that the people attending our seminars need to get things done—and quickly.” Instead of being stuck in “modalities,” Heckman emphasizes that Wharton, as with many other institutions, works toward blending the perspective of academia without falling victim to irrelevant or overly theoretical viewpoints.

Understanding and solving real-world situations is key. For example, as the relationship between the C-suite and board continues to evolve, how to handle unexpected problems is of growing concern. “After the Toyota episode and BP’s ongoing clean-up, boards are reflecting on their role in a crisis situation. We’re planning to run an exercise for senior executives in the C-suite,” Heckman explains, “where these executives must persuade the board—and the board is on the hook to do due diligence—to discover the communication in working together.”

Deep Dives

At UCLA Anderson’s Director Education and Certification program, the course focuses specifically on serving as a corporate director. Robert Humphrey Gyde, associate director of marketing, UCLA Anderson Executive Education, says the basics haven’t changed, but UCLA is gearing its program to post economic-crisis directors seeking guidance in this new uncertain environment. “We appeal to both the senior director as well as a fresh face in the boardroom—both sides have much to learn from one another,” Gyde says. However, while the basics have remained relatively the same, with emphasis placed on strategy, structure and succession, Gyde believes that post-crisis, many directors feel the need to “refresh” themselves. “One thing that is becoming more pressing in the director environment is the need to understand how best to engage with activist shareholders,” Gyde says. “They’re becoming much more savvy—much more web savvy; one reads about caucuses arising online and boards need to think carefully about how they are going to engage with their shareholders.”

The SEC’s recent decision to allow proxy access to shareholders has created an onslaught of activity as directors seek to educate themselves on the implications of the new rules. “Of course, there is now a huge interest in the proxy and how to develop a relationship with shareowners that goes beyond disclosure,” reports Liz Barron, NACD director of education. Case in point: more than 900 people signed up on short notice for a proxy-access related webinar. “There’s a feeling that directors need up-to-the minute insights,” notes Barron. “They need to know what to do now—and what to do next.”

Shareholders have harnessed the power allotted them in virtual chat forums and blogs, allowing them to access the investing public at a faster and more efficient rate than ever before. Directors, whether experienced or new to the boardroom, must address these ever-changing channels of communication. “I think experienced directors may feel they can learn a lot from a new generation of directors who are now entering the boardroom,” Gyde adds. “These new directors have thrived in this new economic, web-based environment—being collegial will offer you a wider perspective on the new reality.”

As the industry continues to change, the face of the boardroom may look far different: Executives in their 30s (and sometimes 20s) are advancing more quickly through the ranks. Gyde believes that while who in academia is leading the learning experience is integral to the success of a program, “who you’re in the room with can be just as valuable as what’s being delivered from the platform.”

Globalization Is Here

As the economic ripple-effect crosses international waters, many executive education programs attract directors serving in the EU, Africa, the Middle East and Asia. “We’re also getting people from Middle Eastern countries, representing sovereign wealth funds, oftentimes, for a European public company,” says Jay Lorsch, Louis Kirstein professor of human relations at Harvard Business School. “We’re getting people from Latin America as well, especially Brazil, as well as India, because many companies are moving from family companies to public companies.” These executives travel to better understand corporate governance issues from a global perspective and attending Harvard’s program allows them to network with colleagues in similar situations, Lorsch says.

“Executive education is now seen as a tool for implementing strategy. How do I take the next 200 to 1,000 people and help them understand the strategy?” — David Newkirk, Darden Executive

“Globalization is real now—we don’t have to teach it,” Darden’s Newkirk says. “There’s a lot of emphasis on cost and quality when running a global business. Many companies have already internalized a cost culture.” Newkirk believes firms are addressing how to best understand customers, create better relationships with external and internal business partners and become a leader in their industry. “How do I take this company and make it innovative?” Newkirk asks. In addition, as emerging markets in China, Brazil and India take hold, the need to stay competitive is forcing executives and directors to form new strategies.

The Diversity Issue

As the economy shifts and companies find themselves regrouping, boardroom demographics are slowly changing as well. While the lack of presence of women and minorities in the C-suite and boardroom remains an issue, executive programs are attempting to encourage increased participation. “We get companies who complain that our classrooms aren’t diverse enough—and then they send us five white males,” Newkirk laments. “We don’t make diversity a requirement…but we offer scholarships to women from nonprofits and we’ve got a program for National Aerospace Company, which we’ve held in Beijing, Tokyo and Hanoi.”

Overall, women and minorities are attending more classes to prepare for C-suite and boardroom responsibilities. “Our last board program group was more than 50 percent women,” UC Berkeley’s Hischier says. “But it seems there is still a pretty small pool of candidates.” While it’s slow going, the C-suite and boardroom are edging along in the right direction. Education is important to avoid the caveat of simply fulfilling quotas.

As the regulatory environment continues to train a spotlight on the practices of financial institutions, executives and directors will continue finding issues such as strategy, risk, crisis management and shareholder communications at the top of their agendas. Today’s executives find themselves evaluating the current economic environment and attempting to keep up with the frenetic, volatile world of the Internet and mass media. Whether fresh-faced or a seasoned pro, today’s executives and directors will continue to need and demand ongoing educational opportunities to reexamine the fundamentals of good corporate governance and strategy, as well as staying current with emerging and ever-changing global economic business challenges.

When it comes to risk and risk oversight, it’s easy to miss the forest for the trees. The board can lose sight of the big picture; risk-taking may yield rewards, and excessive caution may lead to mediocre performance, and even losses.

It is perfectly appropriate—indeed essential— to the health of our economy, and to product innovation and enhancement, for some companies to adopt business models and strategies that have greater risks than others. In successful businesses, however, boards and management work together to define an acceptable level of risk that produces the greatest opportunity for reward. Without risk, there is no reward. True, there may be a need to curb unbridled risk-taking in certain core industries or large companies, but clearly no single solution fits all situations.

Just as corporate America and, indeed, businesses and policymakers worldwide are taking a step back to reassess the state of risk management, every board is well advised to step back and consider its risk oversight objectives.

Before considering how the board should oversee the organization’s activities to manage risk, it is helpful to consider the goals and objectives of this oversight effort. What should the board seek to accomplish in its oversight role?

It is important to note that “oversight” is used in a broad manner in this report; it incorporates both the monitoring function of directors as well as decision-making that involves business judgment.

While risk oversight objectives may vary from company to company, every board should be certain that:

• The risk appetite implicit in the company’s business model, strategy, and execution is appropriate.
• The expected risks are commensurate with the expected rewards.
• Management has implemented a system to manage, monitor, and mitigate risk, and that system is appropriate given the company’s business model and strategy.
• The risk management system informs the board of the major risks facing the company.
• An appropriate culture of risk-awareness exists throughout the organization.
• There is recognition that management of risk is essential to the successful execution of the com-pany’s strategy.

While individual boards may have other, more specific risk-oversight goals, by clarifying these overarching objectives at the outset, a board will be better positioned to determine how to conduct its oversight.

What we also discovered in putting the list together was that in some instances, it became impossible to separate the captain from the team. This year’s D100 is a case in point: Our editors and board of advisors were nearly unanimous in our selection of President Barack Obama as this year’s most powerful corporate governance influence. And yet, to do justice to the seismic shift his policies have brought about in the boardroom, we also had to recognize the many other  “New Voices” in the Administration who are now leading the greatest financial reform of American business since the 1930s.

So, we ask that in the pages ahead you pay more attention to who counts, and less to how we count, in arriving at our final selection of individuals and institutions that have met the requirement to be “most influential.” We think you’ll agree it’s an intricate and impressive mosaic where the whole equals much more than the sum of its parts, which may or may not be greater than 100.

Regulators & Rulemakers

Team Obama
It is often written that reasonable people may disagree, and with Americans and their Presidents, it is practically a way of life. But even an unreasonable person could only conclude that this President and his Administration are having a profound and lasting influence over the boardroom. President Barack Obama has demonstrated an enormous capacity for calm in uncertain times. His relative youth leads to frequent comparisons to John F. Kennedy and his communications skills to those of Ronald Reagan. But it is his aggressive response to the unparalleled economic challenges that greeted him at the dawn of his young presidency that harkens back to an earlier figure of towering influence,  Franklin D. Roosevelt.

FDR’s massive social and financial reform programs—the creation of Social Security as part of the New Deal, the establishment of the Securities and Exchange Commission (SEC) and the Federal Deposit Insurance Company (FDIC)—helped restore confidence in the nation’s banking system coming out of the Great Depression. One could plausibly take major portions of FDR’s New Deal and substitute his name with President Obama’s.  The implementation of the $787-billion American Economic Recovery Act one month after Obama took office, coupled with his handling of the Troubled Asset Relief Program (TARP), which sought to strengthen the financial sector by buying up the assets and equity from troubled banks, has clearly helped the nation avoid further financial disaster and put the economy on the path to recovery.

And finally, turning again to the FDR playbook, Obama assembled a team of wise men and women, formidable economic and business minds, whose decisions are having a lasting effect on the role of the corporate director. Preeminent among them was the choice of Rahm Emanuel as chief of staff. Described as a veritable “influence machine,” within the Administration and Congress, the former Congressman from Obama’s home state of Illinois is known as a hard-charging, brutally candid, sometimes combative, acutely intelligent man who can get things done and knows the ways of the Capitol and the boardroom.

The Enforcers
Perhaps second only to Obama in terms of her influence on boards and corporate governance, career regulator Mary Schapiro heads up the 75-year-old SEC. Before the crisis, the agency’s very existence was in question: “Obsolete,” “out of touch,” and “behind the times” were just some of the many terms uttered by detractors. The Commission, under former chairman Christopher Cox, was pilloried for missing the Madoff scandal.

As former SEC chairman and Directorship 100 Hall of Famer, Arthur Levitt described her: “She has the skills, the intellect, and the character to be a superb SEC chair.” But Schapiro will face a new kind of challenge in the role, not just that of proving her own qualifications, but also instituting a significant remodeling of the SEC itself, as she works to bring it into the new regulatory era.

Moving swiftly to address regulatory concerns in the wake of the financial crisis, the SEC has rolled out a series of proposals that could embody the biggest change to the rules of the game for directors in some time. Schapiro, who is no stranger to the boardroom, having served on the boards of Duke Energy and Kraft Foods, has overseen proposed rule changes on proxy access, broker voting, say on pay, and new requirements for disclosure on executive compensation and director qualifications. It’s now up to her and fellow commissioners Kathleen Casey, Elisse Walter, Luis Aguilar, and Troy Paredes to determine the final regulations that emerge from the proposals.

Other key players Schapiro has brought into the SEC include Senior Advisor Kayla Gillan, Chief Accountant James Kroeker, and Director of Enforcement Robert Khuzami. Gillan was a founding board member of the Public Company Accounting Oversight Board (PCAOB) and former general counsel to CalPERS. Kroeker joined the SEC as deputy chief accountant in 2007 from Deloitte and Touche where he had been a partner in the firm’s national accounting services group. Kroeker recently said that the proposed road map for the convergence of International Financial Reporting Standards,pushed to the back burner amid the larger issues of market reform, would be restored as another top priority. Khuzami is a former federal prosecutor, has pledged to improve the SEC’s enforcement performance by creating specialized units to provide “structure and resources for staff to ‘get smart’ about certain products, markets, regulatory regimes, practices and transactions.”

TARP Overseers
Another example of Obama’s preference for brains over politics was his reappointment of Sheila Bair to chair the FDIC. Another fiscally conservative Republican, on Bair’s watch alone this year, 94 banks have failed, creating a new challenge:  how to replenish the fund. Bair has also been an integral part of the team overseeing TARP. Neil Barofsky is a former New York assistant attorney general confirmed by the Senate in December as special inspector general. Dubbed the “TARP Cop,” his job is to figure out how and where the $700-billion TARP funds are spent, reporting directly to the President and providing updates to the Congressional Oversight Panel chaired by bankruptcy expert and Harvard Law School professor, Elizabeth Warren. COP’s first report, released in February, casti-  gated then-Treasury Secretary Henry Paulson for his performance and lack of transparency, reporting that the Treasury Department  had overpaid by $78 billion for the assets it bought from banks.

Interestingly, while Obama sponsored and was a strong proponent of  “say on pay” legislation while a senator, since appointing Kenneth Feinberg special master of compensation, he has appeared unwilling to make the issue a top priority. Feinberg, who has immersed himself in some of the country’s most troublesome and high-profile cases, is considered a superb choice, both in terms of skill and temperament, by Capitol Hill insiders. His most noteworthy case was the 33 months of pro-bono work he did following the 2001 terrorist attacks to determine how much each victim would receive from the federal government’s September 11th Victim Compensation Fund.

Feinberg may in fact be perfectly suited for a job that most compensation specialists see as thankless, and possibly as a “no win” situation. As the Obama Administration’s comp expert, Feinberg was called on to monitor the compensation of executives in what were once some of America’s most prestigious corporations, now TARP recipients, including American International Group (AIG), Bank of America, Citibank, Chrysler, GMAC, and General Motors.

Fed to the Rescue
To prevent American capitalism from spiraling deeper into the abyss, nine months after President Obama made his first Cabinet announcement, he re-nominated Ben Bernanke as Federal Reserve chairman. The former Princeton economics professor was selected by Bush in 2005 to succeed Alan Greenspan. In 2008 after the market crashed, Bernanke invoked emergency powers, slashed interest rates, and spent trillions of dollars to right the financial system. Just last month, he declared the recession “likely over.” Though he seldom gives interviews, Bernanke is never far from the public eye and has been a stalwart in the transition between presidential administrations and in the effort to stem the economic slide.

When then President-elect Obama named his economics team, it included players who, like Bernanke, were already steeped in the crisis details, demonstrated a studied understanding of Depression-era economics, or some combination of both. Enter Treasury Secretary Timothy Geithner and Chief White House Economic Advisor Lawrence H. Summers. Geithner, who is currently pushing legislation to provide more systematic regulation of financial institutions, including new limits on executive compensation, recently told one interviewer that he is optimistic major reforms will be passed.

Prior to his appointment replacing Henry Paulson, Geithner was president of the Federal Reserve Bank of New York and part of the team central to the critical negotiations that resulted in Bear Stearns being tucked into JPMorgan Chase, Merrill Lynch going to Bank of America, Lehman Bros. disappearing, and Citigroup and other struggling banks getting a lifeline.

Summers, the former Harvard University economist who became its president following his tenure as Treasury Secretary to President Clinton, is director of the Cabinet’s National Economic Council. The group was established in 1993 to coordinate and ensure that the President’s economic policy agenda is carried out.

Rounding out the team, Paul Volcker, the former Fed chief under Clinton, was selected to chair the president’s economic recovery advisory board. And Christina Romer, a former UC Berkeley economist, who administration sources suggest is well- regarded by both parties, chairs the Council of Economic Advisers. Her appointment was seen as a further triumph of brain over politics in Obama’s approach to talent recruitment.

“Short-termism must be addressed as a conceptual whole — piecemeal approaches do not work,” said Judith Samuelson, executive director of the Aspen Institute’s Business & Society Program. “Now is the time for bold ideas to drive change in the incentives and behaviors critical to transformation of how value is created and sustained.”

Institutional investors have a louder voice and corporate governance experts are asking that they promote investment policies that will promote long-term health of capital markets and public policies that encourage business managers and boards to focus on sustainable value instead of short-term, short-lived gains.

Some short-termism problems:

• First, high rates of portfolio turnover harm ultimate investors’ returns, since the costs associated with frequent trading can significantly erode gains.

• Second, fund managers with a primary focus on short-term trading gains have little reason to care about long-term corporate performance or externalities, and so are unlikely to exercise a positive role in promoting corporate policies, including appropriate proxy voting and corporate governance policies, that are beneficial and sustainable in the long-term.Risk-taking is an essential underpinning of our capitalist system, but the consequences to the corporation, and the economy, of high-risk strategies designed exclusively to produce high returns in the short-run is evident in recent market failures.

• Third, the focus of some short-term investors on quarterly earnings and other short-term metrics can harm the interests of shareholders seeking long-term growth and sustainable earnings, if managers and boards pursue strategies simply to satisfy those short-term investors. This, in turn, may put a corporation’s future at risk.

Shareholder power is likely to grow as Securities Exchange Commission Chairman Mary Schapiro continually calls for greater transparency between shareholders and their boards/management teams.

Signatories to the statement: “Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management,” include:

John C. Bogle, founder, The Vanguard Group

Warren E. Buffett, CEO, Berkshire Hathaway

James S. Crown, president, Henry Crown and Company

Lester Crown, chairman, Henry Crown and Company

Steven A. Denning, chairman, General Atlantic

Jack Ehnes, CEO, CalSTRS

J. Michael Farren, former general counsel and corporate secretary, Xerox

Margaret M. Foran, governance expert

Barbara Hackman Franklin, chairman, National Association of Corporate Directors and former United States Secretary of Commerce

Bill George, professor of management practice at the Harvard Business School and former chairman and CEO, Medtronic

Louis V. Gerstner, Jr, retired chairman and CEO, IBM

David H. Langstaff, founder and former CEO, Veridian

Martin Lipton, partner, Wachtell, Lipton, Rosen & Katz

Jay W. Lorsch, Louis Kirstein Professor of Human Relations at the Harvard Business School

Ira Millstein, senior associate dean for corporate governance, Yale School of Management and senior partner, Weil, Gotshal & Manges

John F. Olson, senior partner, Gibson, Dunn & Crutcher and distinguished visitor from practice, Georgetown University Law Center

Peter G. Peterson, chairman and founder, Peter G. Peterson Foundation

James E. Rogers, chairman, president, and CEO, Duke Energy

Felix G. Rohatyn, former U.S. Ambassador to France

Charles O. Rossotti, former United States Commissioner of Internal Revenue; co-founder and former chairman and CEO, American Management Systems

Judith Samuelson, executive director, The Aspen Institute Business & Society Program

Henry Schacht, former CEO, Cummins and Lucent Technologies

Lynn A. Stout, Paul Hastings Professor of Corporate and Securities Law, UCLA School of Law

Richard L. Trumka, secretary-treasurer, AFL-CIO

John C. Whitehead, former chairman, Goldman Sachs

John C. Wilcox, chairman, Sodali and former head of corporate governance, TIAA-CREF

Ash Williams, executive director and CIO, Florida State Board of Administration

James D. Wolfensohn, ninth president, World Bank Group